Let’s face it, no one really likes paying down their mortgage. Although it’s exciting to finally find your dream home, and even better to be paying a great rate on it, it’s most exciting for it to be paid off. By finding a mortgage with prepayment privileges, you can have that satisfaction and accomplishment of making your final payment that much sooner. Here’s how.
How do Prepayment Privileges work?
A prepayment privilege is an available option in some mortgages that allows you to pay more than the specified rate. Exact prepayment rate options vary amongst lenders, and some go as high as 20/20. Meaning that, in addition to a lump sum of up to 20% of your mortgage, you can up your usual payment by 20% as well.
Increasing your monthly payment:
Imagine you’ve just started making payments on a new home, worth $475,000. At the regular rate of 2.44%, this comes to a monthly payment of $1,583.33. Assuming your mortgage is amortized over 25 years, after 5 years of regular payment, you’ll have 20 years left, and have paid $69,499.80.
But, if you were to make your regular payment with a 20% increase, your monthly payment would go up to $1900 a month. After five years at this increased rate, you would have paid $114,000, and have cut roughly five years off of your mortgage amortization!
Increasing your monthly payments is a great way to slowly but surely speed up the process of paying off your mortgage. However, an additional 20% to a mortgage every month isn’t feasible for many homeowners. This is where lump sum prepayment privileges can come in handy.
Lump sum payments:
One of the advantages of prepaying for your mortgage with lump sums, is that the payment goes directly to the principal of the mortgage. What does this mean? For starters, you’ll immediately be paying less for interest in your monthly payments. Your amortization period will also decrease, just like it would if you were to increase your monthly payment.
Using the example above, you could hypothetically pay $95,000 a year for five years, and have your mortgage paid off twenty years earlier than you otherwise would. In an ideal world, we’d all be able to take advantage of this option. However, not everyone is able to put so much money toward a mortgage at one time. This is why most lenders offering prepayment privileges will allow lump sums to be paid in increments as low as $100.
Lump sum payments are a great option for those looking to pay off their mortgage as quickly as possible, without committing to an increased monthly rate. Major financial events such as promotions, bonuses, and inheritances can all be perfect opportunities to make lump sum payments on your mortgage, and to get one step closer to total financial freedom.
Choosing a mortgage
In general, a mortgage with prepayment privilege options can provide you with greater flexibility in how you pay your mortgage. However, every financial situation is unique, and some mortgages can be more or less suitable, depending on the needs of the homebuyer. If you’re already doing your research on prepayment privileges, you’ve taken the first step to ensure your success in finding the perfect mortgage.
For customized, specialized, and qualified mortgaging consultation and advice, look no further than Milka Lukacevic and the experts at The Mortgage Centre. We’re ready to help you secure the home, rate, and mortgage of your dreams, contact us today.